Buyout executives hoping that tough trading conditions will lead to cheaper asset prices will have to wait a little longer, according to Bain & Co.’s private equity chair Hugh MacArthur.

“If people are expecting multiples to come way off, they will be sorely disappointed,” MacArthur said in an interview to discuss the consultancy firm’s annual private equity report. “There is still a mountain of dry powder out there.”

The private equity industry’s dealmaking frenzy finally slowed last year as financing markets froze up, borrowing costs increased and concerns about the wider economy grew. But globally, private capital firms were still sitting on a record $3.7 trillion of unspent cash at the end of 2022, more than treble the amount they held in the industry’s last boom years before the global financial crisis.

The mounting pile of cash coupled with the cheap financing of previous years has driven up prices as buyout firms competed for the best assets. Despite difficult market conditions, they’re still under pressure to deploy that capital, which will ensure that competition for deals remains fierce and that prices are high, according to MacArthur.

Adding to the pressure on industry executives are two more factors: the rising cost of the debt private equity firms use to do their deals, and the economic headwinds that make it tougher to boost their returns from a portfolio company. 

On the capital front, some firms are increasing the amount of equity they invest in deals, with a view to refinancing when debt becomes cheaper at a later date. 

“We’re seeing more transactions financed with 70 percent equity and 30 percent debt instead of the usual 50 percent-50 percent structure,” according to Bain’s annual report. 

“It’s become very common for smaller and medium-sized deals,” MacArthur said. “Firms are saying ‘look, if I’ve got a good deal to do, I’ll do it and fix the capital structure later’.”

While asset prices aren’t going to get much cheaper in the near term, they also won’t continue rising at the rate they have, meaning firms will have to drive returns themselves even as the economy slows and inflationary cost pressures filter through. 

This will increase scrutiny of managers to prove they can generate profits by growing their portfolio businesses and without relying on cheap debt and a growing economy. Firms that can’t do this might not be able to raise money again, MacArthur said.  

“Returns have been coming down in the industry for 25 years,” MacArthur said. “If you are in the bottom quartile and there are firms that have done the wrong deals at the wrong time, it’s going to be tough to raise capital again,” he added.